Stories to Make You a Smarter Investor w/ Kyle Grieve (TIP792)

Summary

• Patient Compounding: Emphasizes Long Term Investing and masterly inactivity, citing historical analogies and Buffett’s maxim that patience transfers wealth from the active to the inactive.
• Coca-Cola (KO): Uses the Ronaldo headline to show correlation bias and ex-dividend mechanics, underscoring the need to verify narratives with data.
• American Express (AXP): Recounts the salad oil scandal and Buffett’s channel checks, highlighting brand durability, Consumer Finance dynamics, and the payoff from rigorous Due Diligence.
• SPAC Risks: Draws parallels from the South Sea bubble to modern SPACs, warning of asymmetrical incentives and speculative hype detached from fundamentals.
• Inflation Hedging: Details how inflation silently erodes cash and advocates allocating to appreciating assets (equities, real estate, etc.) to protect real returns.
• Real Estate: Through Hetty Green’s example, spotlights Value Investing in income-producing assets and opportunistic buying during forced sales as a durable approach.
• Market Volatility: Reviews Black Monday 1987 and swift rebounds, stressing liquidity’s role and the dangers of overconfidence and “autopilot” investing.
• Lumine Group (LMN): Notes a 58% drawdown from highs as a buying opportunity to build the position at a discount, exemplifying disciplined add-on behavior.

Transcript

So, if you're a long-term investor, your default state should be inactivity. If your portfolio is full of businesses that have high returns on invested capital, ample reinvestment opportunities, and are run by excellent management, and have a great culture, your best activity is just to do nothing. Chances are the business will continue doing really well for many years, and any short-term hiccups will simply be resolved due to the combination of the company being great and being run by a talented management team. Hey, real quick before we jump into today's episode, if you've been enjoying the show, please hit that subscribe button. It's totally free, helps out the channel a ton, and ensures that you won't miss any future episodes. Thanks a bunch. We're going to discuss a series of great short stories to help us make us smarter investors. We'll be drawing wisdom from a book that I recently read called Trailblazers, Heroes, and Crooks by Steven Forester. Now, stories are the best way in my opinion to learn something. And that's because a good story is vivid and memorable and I think really helps take understanding of key concepts and retention of those concepts to a whole another level. I try to tell myself stories about businesses and share them with you because it helps me remember some of these subtle nuances that I think can be integral to a thesis and I hope it helps you remember them better as well. So, let's dive right into a story that helps investors understand noise. the ill effects of listening to the media and maybe how investors confuse correlation for causation. This one, oddly enough, comes right from the famous footballer Cristiano Ronaldo. So on June 16th, 2021, the Washington Post issued a headline article titled, "Cristiano Ronaldo snubbed Coca-Cola. The company's market value fell $4 billion." Now, to many people that might sound strange, and I tend to agree, but we live in a world where athletes can exert very, very significant amounts of influence. So, looking at Ronaldo, he has 668 million followers on just on his Instagram account, which is incredible. So, it's not really surprising that if Ronaldo were to put his support behind some idea, no matter what it is, it could theoretically move markets. Now, let's rewind to June 16th, 2021, the day the article was discussed. So during a press conference, you see Ronaldo approach a seat where there's two glasses of Coca-Cola prominently displayed. He looks at them with a slightly puzzled look, reaches for both of them, and then moves them away from him, replacing them with a bottle of water. He then says, "Awa, no Coca-Cola." The article's premise was that because Ronaldo felt this way about Coca-Cola, select shareholders sold out of the company, as they thought that this event might be bearish somehow to Coca-Cola's business. Now, was this true or was it just a matter of a media outlet maybe just looking for a story? To understand the answer to that question, we must first quickly break down dividends. So many of our listeners are probably very familiar with how dividends and X dividends work. But for those who aren't, let me just give you a quick primer. So the X dividend date is simply when you must hold a stock in order to qualify to be paid a dividend. There's a bit of a lag time between the X dividend date and the date that the dividend is actually paid. If you aren't a shareholder on the X dividend date, you do not receive the quarterly dividend until the next one, provided that you hold shares until the next X dividend date. Now, generally, when a business has its X dividend date, the stock price will plummet by the amount of that dividend. So, the value of the company just kind of remains the same. So, let me just give you a quick example in case that doesn't really make any sense to you. If a stock is priced at, say, 100 bucks and has a $1 dividend, then on the X dividend date, the stock's price will drop to $99. And that's simply because shareholders will receive the $1 dividend, which still provides the $100 value, provided no new information or developments occur. Now, June 14th, 2021 was the X dividend date for Coca-Cola, which means that shares were actually expected to drop in anticipation of that dividend announcement. And shares of Coca-Cola began falling even before that press conference with Ronaldo. So, here's what Forester writes. Ronaldo removed the Coke bottles at 9:43 a.m. New York time. And through the remainder of the trading day, Coca-Cola's stock price actually rose both in absolute terms as well as relative to the overall market. Now, while the Washington Post's statement was kind of correct that Coca-Cola's market value decreased by that $4 billion number, it was completely incorrect in the reasoning for that drop. Sure, you know, they could have pointed out that the X dividend part of the story actually mattered and maybe they should have mentioned that to the readers, but then the story just becomes a lot less interesting and juicy. So, what the author essentially succumb to if they weren't paying attention to some of these other things was something called correlation bias. So correlation bias is a cognitive error in which an individual perceives a relationship between two variables or events when no such relationship actually exists or is much weaker than it was initially believed. So let me give you an example here. Let's say that I go to sleep one day and I forget to floss my teeth and perhaps when I wake up the next morning I look outside and it's raining. I could then maybe correlate that it's raining with the fact that I didn't floss my teeth. Now, obviously this is completely nonsensical, but it really just illustrates just how far humans will go to find patterns and connections where they just don't exist. And correlation is a very real issue in investing. With so many people sharing their opinions on various topics, it's really challenging to know who to trust. The best defense that you can have is to have a critical mind. Never blindly follow a statement without doing your own research and looking directly at source material. If someone says something, have a look at the statistics that back up what they say. Are they using the same source material or are they just going by hearsay? This is why it's so essential to conduct your own due diligence on a business. Can you outsource some of this to others? Yes. And the majority, I think, of the market actually relies on the advice, opinion, and work of other people. However, the majority of the market also fails to achieve good results. So, craft your own thesis, utilize your own information, and draw your own conclusions. Otherwise, you risk correlation bias which in the markets can result in significant financial losses. Now, the next lesson comes from two very well-renowned combatants in human history. The first was a gentleman named Quintis Fabius, a Roman dictator and general, and the second, Muhammad Ali, the legendary boxer. So, Quintis Fabius rose to power in 2011 B.C.E. leading up to this point, a war raged between Rome and Carthage. Carthaginian general Hannibal Barka ravaged what is now known as Italy, winning minor skirmishes and significant battles alike. Rome was starting to get kind of fearful of Hannibal's growing military strength and decided that they need to squash him to maintain power and order. So Fabius led Rome's armies at this time. Fabius understood that Hannibal didn't really care to capture Rome because Hannibal could simply just lay waste to Rome's smaller cities and still have similar effects. So instead of focusing on protecting Rome, Fabius decided to venture out to some of these smaller cities and defend them against Hannibal while his own army could be reinforced. So his first stand was in Aikai, a town in southern Italy. When Hannibal found out that his army was camping there, he struck. But instead of fighting, Fabius's armies just showed no response. And as a result, Hannibal's army retreated to their own camp. Fabius was simply biting his time to allow his numbers to grow. Sure, he allowed for some minor skirmishes just to maintain morale with his troops, but he wanted to wait for the right time when he had the upper hand to make a full frontal assault. And as a result of this inactivity, he eventually found himself in the right battle that he thought he could win. Forester calls this masterly inactivity. Now, let's fast forward a couple of millennia to October 30th of 1974. This was the date of an epic fight titled The Rumble in the Jungle between George Foreman and Muhammad Ali. At this point in Ali's career, he was kind of past his prime, but he was still a very, very dangerous boxer. Now, keep in mind here that Foreman was the clear favorite. In 40 fights previously, he'd never lost, and he knocked out 37 of his opponents. So, going into the fight, Ali knew that he would need to get his strategy right in order to beat Foreman. So, what information could Ali obtain to help him design this strategy? Well, for one thing, Foreman's fights were all pretty short. So, the book mentions that none of the opponents that Foreman knocked out made it past the third round. Now, that's a pretty crucial data point. Perhaps Ali could have focused on the fact that Foreman wasn't really the type of boxer to go the distance in a fight and win. So, as the fight began, it appeared that Foreman was winning. Foreman was pinning Ali against ropes and repeatedly hit him with hooks and uppercuts to Ali's midsection. In the fourth round, Ali skipped resting on the bench altogether and handed up making a face to the ringside TV camera. This strategy continued for seven rounds while Foreman began getting more and more tired. In the eighth round, Alli took advantage of his intentional inactivity and hit Foreman with the flurry of blows that defeated him. So, the data on this fight was quite fascinating. Foreman threw 461 punches to Ali's only 252 and he landed on 194 of those to Ali's 118. So instead of doing what most of Foreman's opponents had done and attempted to face Foreman in the middle of the ring, Ali realized that he had to be patient and wait for the right time to attack. So he accepted that he would have to play defense until Foreman got tired and then he would launch his attack. And it worked. The strategy that he employed here was what he called rope a doe because Ali spent so much time on the ropes before making his winning stand. Now the concept of intentional inactivity is crucial to achieving investing success. Buffett once said, "The stock market is a device for transferring money from the active to the patient." Or written differently, the stock market is a device for transferring money from the active to the inactive. Now, the thing about inactivity is that it is a form of activity. Here's what Nick Sleep and Kakario wrote about that in the Nomad Investment Partnership Letters. The research continues, but as far as purchase or sale transactions in Nomad are concerned, we're inactive. An act of except perhaps for the observation seldom made that the decision not to do something is still an active decision. It's just that the accountants don't capture it. We have broadly the businesses we want in nomad and see little advantage to fiddling. So if you're a long-term investor, your default state should be inactivity. If your portfolio is full of businesses that have high returns on invested capital, ample reinvestment opportunities, and are run by excellent management, and have a great culture, your best activity is just to do nothing. Chances are the business will continue doing really well for many years, and any short-term hiccups will simply be resolved due to the combination of the company being great and being run by a talented management team. So, where most investors make costly mistakes is in thinking that they must stay active to perform well. There aren't many jobs where doing less actually yields better results. Now, when you think about athletes or other outperformers, you think of guys such as, you know, Michael Jordan who was not only super talented, but also had an otherworldly work ethic to continue to get better and better. So, that kind of hustle quality is just embedded in many of us and we erroneously apply it to investing as well, but it's not necessary. All of my biggest winners occurred because the businesses performed exceptionally well, and I didn't bother tinkering with them, taking profits, or attempting to time the market in any way. I just left them be and just waited around for the results to follow. Now, Bobby Bonia stopped playing baseball for the New York Mets in 1999, but to this day, he still collects $1.19 million from them, and that's not stopping anytime soon. He'll continue receiving these payments until 2035. So why on earth is he getting paid this way? So let's go back to the year 1999. New York's going crazy because tech companies are going to the moon daily and the levels of speculation are about as high as you can possibly imagine. As for the Mets, they had signed Bonia to a 2-year contract in 1998. In 1999, he agreed to have his contract bought out for the 2000 season. He was set to make $5.9 million in that season. However, Mets management along with Bonia and his agent devised a very interesting deal structure. First, Bonia had an agent who helped him bring this idea for the deferred contract to Bonia and to New York Mets management in the first place. The agent's name was Dennis Gilbert. Now, you see, Gilbert was also a former MLB player, and he understood how many professional athletes were incredible at their sport, but not so incredible with their money. So, here's what Gilbert said about Bobby Bonia in the contract. From the first day that Bobby became a client, all of our conversations were valved around saving money for the future. A lot of my friends from the minor leagues who went to the big leagues were retired and just broke. It's just taking money out of the bank today and putting it in the bank tomorrow. While I'm sure Gilbert had his client's best interest at heart, this was a deal that obviously also benefited him. If we assume Gilbert got say 4 to 5% of Bonia's total of 29.8 8 million over 25 years. Then Gilbert walked away with1 to $1.5 million. So it was a very good deal for him as well. So Gilbert could wrap the deal with Bonia as a way to become more financially sound in the future while also enlarging his own pockets at the same time. After all, the fear of being a broke athlete in retirement is one that I'm sure is very top of mind for many players once they start reaching their Twilight years. But here's the weird part. Essentially, the deal was an annuity from Mets ownership's perspective. It allowed them to free up money today to spend on other things, whether that be operational or personal. The contract was delayed until 2011 when Bonia would begin receiving his first payment. The interest rate on that was 8% on the money for about 11 years when the deal was brokered and the date of his first payment. Then it was advertised over the next 25 years. So there's a quiet force operating in the background here known as compounding. But this concept is directly related to the time value of money, also known as TVM. So TVM simply means that a dollar today is worth more than a dollar tomorrow. For instance, if you can compound cash at 8% a year, then a dollar today is worth about $18 a year from now. And you can see how money when invested widely today obviously is very valuable. This was why they applied that 8% interest to Bonia's contract. Now the most remarkable aspect of this narrative is just how events kind of unfolded in different directions for Bonia and Met's owner Fred Wilpon. So Bonia, you know, he kind of made out like a thief, but Fred Wilpon had recently achieved some incredible investing results from a fund that he was invested in. Wilpon was invested with Bernie Maidoff, and that fund provided 14% annual returns between January 1990 and June of 1999. So if Wilpon had invested that 5.9 million with Maid Off and it wasn't a fraud, Wilpon would have made a lot more money investing that money today and deferring those payments to Bonia for a later date. Now, whether that decision actually affected his decision, completely unknown. But the true lesson here is that a carefully constructed contract can be used to improve your life if you're willing to defer gratification. For those unwilling to defer gratification, you open yourself up like Mr. Wilpon did to investing with unscrupulous characters such as Bernie Maidoff. But I'm not here to pick on Fred Wilpon as Maid Off fooled everyone, including the SEC, into thinking that he was legit for a very, very long time. So what exactly was Maid Off doing that helped him fool so many people for so long? The problem was that Maid Off had a great standing in the investing community. In 1960, he launched Bernard L. Maidoff Investment Securities or BMIs. This was his legitimate business that was a brokerage. As far as everyone knows, this business was real and not part of Bernie scheme. So why on earth would Bernie launch a scam that ended up harming everyone around him, including his loved ones? The exact start date of Bernie's Ponzi scheme is not known, but what we do know is that there were some very, very close calls. For instance, in 1992, the SEC received a tip from the customers of an accounting firm called Avalino and Bines. This accounting firm referred business to Bernie Maidoff in return for a referral fee. A&B was soliciting loans from their clients to be used with an unnamed Wall Street broker. This broker offered a too good to be true 14% return with nearly no risk. According to A&B, they wrote, "At no time is a trade made that puts your money at risk. In over 20 years, there's never been a losing transaction." Now, as part of the SEC due diligence, they actually ended up doing a site visit to Maid Off's business to verify his security positions. But rather than gathering the data from a third party that actually processed and settled transactions, they used Maid Off's in-house numbers, which we now know were fraudulent. A and B were then forced to shut down, returned $441 million of capital that they had borrowed from their clients, and during the sign, they basically refused to cooperate any further, and they were permanently banned from selling any types of securities. But this was actually 16 years before maid off was exposed. But, you know, Bernie was just not an ordinary thief. The way he did things was just darker. You know, he would take widows into his arms at funerals and tell them that he would help take care of them by managing their money for them. He was a true deviant who I think probably lacked empathy and had psychotic tendencies. Luckily, there was one person out there willing to expose maid off for the fraud that he was. So, in 1999, a gentleman named Harry Marcopoulos was working for an asset management firm called Rampart Investing Management Company. So, Harry was introduced to Bernie's fund through an acquaintance. And when asked about what he was kind of doing, essentially it was just a hedge fund where he was buying stocks and then hedging it with derivatives. This isn't really a novel approach. It's been used for a very, very long time. It's just not something that I personally find very interesting. But I think what really caught Harry's attention was just how specifically Bernie was making it work for him. So Harry also wanted 14% returns with no risk for himself and for his company. So he looked at Maidoff's trades, reverse engineered it, and tried to see if maybe it was possible to actually make these returns with no risk. And after about 5 minutes, he concluded that Maid Off's numbers were completely fraudulent. So Maropoulos developed six red flags. So they were things such as how exactly he could generate those returns, how there weren't enough derivative securities in the world to provide the purported hedging that maid off was going for and how it wasn't possible to achieve maid off's reported returns in the first place. Additionally, he pointed out that maid off didn't allow any outside auditors to look at his books. Harry brought this up in 2000, 2001, 2005, 2007, and again in 2008, but the SEC, for whatever reason, failed to heed his warnings. Outside of Maropoulos, Maid Off was getting discovered by the media. This was an event that Maid Off was definitely trying to avoid as he would have known that any additional scrutiny on his fund would have exposed him to a lot of risk. So in 2008, due to the great financial crisis, Maid Off scheme was exposed. Ponzi schemes like this rely on new money coming in to pay for redemptions. When liquidity is completely sucked out of the market and no new money is coming in, maid off became unable to meet redemptions. He ended up confessing to his two sons that the hedge fund was a fraud and they told the FBI who ended up arresting him. So the lesson here isn't that we should necessarily be smart enough to uncover overly complicated financial frauds. Had I been looking at this fund back in the 90s, I probably would have been really impressed with his results. But I don't think I would have ever actually invested my money with someone who is so dependent on derivatives cuz that's just not something that I find very interesting or safe. But also, you know, there's no way that I would have concluded that this was a fraud either. But obviously, there's less sophisticated investors that wouldn't be worried about how the fund is getting the returns, just about what the results would be. And I think this is exactly what made off prayed on. The real lesson here is in due diligence. If you were to invest in someone, just make sure to take some time to understand exactly what they're doing to make their money. And if you can't figure it out at all, then perhaps it's better to just skip them and try someone else. Some managers outperform, but never losing money is just something that doesn't happen. It never happened to Buffett, and it's unlikely to happen to anybody else because it's just not rooted in reality. So, if someone tells you that they can make money for you with zero risk, run. Do not walk in the opposite direction. Now the problem with maid off is that when you earn good money for people word obviously gets out and when word gets out that others are making money then that piles more and more people into a fund or position and what you ultimately get is fear of missing out or FOMO and FOMO doesn't only affect the unintelligent it affects absolutely everyone. If I asked you to think about Sir Isaac Newton here for a second what comes to mind? Probably something to do with you know his laws on thermodynamics. Here you have one of, if not the most intelligent person in the history of mankind, making some of the most boneheaded investing decisions ever. You'd think his intelligence would have helped him overcome the emotional problems that most investors face. Yet, intelligence is not powerful enough to save us from our own emotions. Which raises the question, if intelligence can't overcome emotions such as FOMO, what does? So, let's rewind to 1711 when the South Sea Company was formed as a joint stock company in Britain's Parliament. It planned to reduce the cost of national debt in return for providing monopolistic trade with Spanish colonies in South America, Central America, the Caribbean, and a few years later, exclusive right to sell slaves in that region. In January of 1720, the stock rose from £128 to nearly £1,000 by August of the exact same year. Now, what precipitated this 8x in its share price? Were there massive increases in revenues, profits, or dividends? No, not at all. So when I looked a little deeper into it, it's kind of hard to not call this a fraud, similar to what we just discussed with Bernie Maidoff. The South Sea company didn't have any revenue to speak of, let alone profits or dividends. It was pure speculation with a lot of financial engineering and false promoters. The difference between this and made off was that it was perpetrated by the British government and not a random rich person. So here's how it worked. The government helped the company by allowing it to take over national debt. The company, backed by the government, emphasized the company's upside to the public to help increase its value. Part of the reason that the government wanted it to do so well was to entice holders of government bonds to convert those bonds directly into South Sea stock, which would eliminate the government's need to repay bond holders. So, the director and founder of this conversion scheme named John Blunt was driven by two things. The first was to drive up the stock price by any means necessary and the second was to create as much confusion in the conversion process as possible. Note that there's no mention of actually creating value. So you can see how with the government's help, it would be even easier to manipulate the price of the South Sea company. The more people who converted their bonds to the stock would add additional demand to the stock, further increasing its prices. And to stoke the fire, Blunt even allowed leverage to acquire shares in South Sea, allowing new investors to subscribe to shares for only 20 cents on the dollar. Blunt took it even a step further due to the connections that he had with the government. There were, after all, many members of Parliament who owned South Sea Company stock. So Blunt encouraged Parliament to pass something called the Bubble Act, which made it illegal for other businesses to try to take advantage of public markets. You could argue that he was just trying to dissuade competition for fund inflows. If you have one company, then all the inflows go there. If you have 30, then you have to distribute the inflows, albeit unevenly, among all of them. Blunt knew exactly what he was doing. Unfortunately, all this fiddling ended up backfiring right in Blunt's face. Instead of dissuading other businesses to try out the open market, ended up scaring investors who were already invested in the market. And that started a domino effect. Margin loans were called in, forcing more selling pressure. International owners sold their stock. Then Southseas company owned lender, Swordblade Bank, failed. So Newton's involvement was pretty interesting. He actually bought it pretty early, made some decent money, and then he sold it. But as a stock price rose, he actually re-entered the position. Then even as the stock was in freef fall, as a bubble popped, his conviction in the business encouraged him to purchase even more shares. Had he just held all of his shares and sold near the peak, he would have had £250,000. Instead, he lost nearly everything. So, a 2013 paper titled Computers and Human Behavior had a great definition of FOMO, calling it a pervasive apprehension that others might be having rewarding experiences from which one is absent. And that pretty much perfectly defines exactly what happened to Isaac Newton and scores of other investors during the South Sea company bubble. And that's why protecting yourself from FOMO is just so essential. So here's five quick ways to avoid FOMO. The first stay disciplined. If you have an idea for an investment, execute it and don't change it because others are making money while you aren't. The second is to take advantage of dollar cost averaging. If there's a position that you like for the long term, add small amounts of money to it over time. This will help you avoid taking excessive concentration risk. Third is to just simply, you know, avoid hot tips from people that you know who are not investors. Fourth, if you think that you'll regret selling a stock if the price increases, then avoid tracking an asset's price after you sell it. And fifth is to just focus on the long term. Do not check stock prices daily if you know that large fluctuations are going to cause you to make errors. Now, Hedi Green is one of the best value investors that you've never heard of. Probably because she was a value investor before Benjamin Graham was even born. And it also didn't help that she was a powerful woman in a time when men ruled financing and investing. Hedi made her forge him by leveraging the money that she received from her inheritance into investments that paid off. The investing part was nothing that would probably surprise you. She owned things like railroads and not just the company's equity, but also their bonds, giving her a very detailed look at a business's fundamentals. And she invested in railroads during its heyday along with some of the best railroad titans in American history, such as JP Morgan, Andrew Carnegie, and Commodore Vanderbilt. But Hedi had her hands in all sorts of asset classes. She owned mortgages that paid regular dividends. For instance, she owned property from Boston to San Francisco and between Maine and Texas. She owned steamboats, gold mines, iron mines, and even churches. She is the original value investor. Here's what she said regarding value investing in real estate. I would advise any woman with $500 at her command to invest in real estate. She should buy at an auction on occasions when circumstances are forced sale. If she will look out for such opportunities, she will surely come and she will find that she can buy a parcel of land at about onethird of its appraised value. I regard real estate investments as the safest means of using idle money. Here you can clearly see that she had a very firm grasp of price and value and could clearly understand how price and value were likely to converge over time. But she was also a bargain hunter by nature. So at one point she found a horse carriage that was cheaper than the one that her husband had just purchased. She secured the discount by first finding someone who held a grudge against the seller. She then learned from this person all of the faults in the carriage. Then when she proposed buying it from the seller, she listed off all the faults and bought the carriage at a reduced price. So Hedi was also ridiculously frugal. She was actually in the Guinness Book of World Records for that. So she reportedly bought sacks of broken graham crackers just to save money. When she went to the butcher, she would ask for free bones for her dog. She bargained for incredibly cheap goods such as things like potatoes. She would move from boarding houses to hotels to avoid paying city and state taxes as she actually didn't report a residence. Once she had a court appearance because she tried evading a $2 licensing fee for her favorite dog. Now, by the time she'd amassed a $60 million fortune, she was living in a $5 per week boarding house. Now, I think the main lesson from Hetty Green was that you can become very successful investing in incomeroucing assets. an area of investing that I admit I completely ignore. Hedi showed that leverage wasn't necessary. She never ended up buying on margin and she believed that the secret to business success was to simply buy when nobody wanted the asset and sell when everybody wanted it. I'll lead the section on Hetty Green with some of the lessons that she learned during the panic of 1907. I saw the situation developing 3 years ago and I am on record predicting it. I said that the rich were approaching the brink and that panic was inevitable. There were signs I just couldn't ignore. Some of the solidest men of the street came to me and wanted to unload all sorts of things from palatial residences to automobiles. There had been an enormous inflation of values. And when the unloading process began, the holders of securities found great difficulty in getting real money from the public. I saw the handwriting on the wall and I began quietly to call in my money, making a few transactions and getting my hands onto every available dollar of my fortune against the day that I knew was coming. When the crash came, I had my money and I was one of the very few who really had it. The others had securities and their values. I had the cash and they came to me. They did come to me in droves. Moving on here. How did a series of container tanks holding very, very minimal amounts of oil and a lot of seawater help generate one of Warren Buffett's greatest investments? First, we look at this anonymous tipster known only as the voice. So, this person reported that tank number 6006 in a warehouse in Bayon, New Jersey was actually not full of salad oil as it was supposed to be, but was also filled with sea water to give the appearance of being full. So, why did he report this? Was he bored, mistreated, or did he have a hint of guilt? Actually, none of the above. He did this purely for selfish reasons as he wanted money in exchange for more information. Now, this warehouse was owned by a gentleman named Tino D'Angelus, a brazen but, you know, kind of sloppy crook who had clearly been a criminal for probably his entire life and definitely his entire adult life. For instance, his business record included the following. being fined for $100,000 for exporting substandard cooking fat to Yugoslavia. Being fined $100,000 for selling inferior meat products. Being fined yet another h 100,000 for exporting inferior lard to Germany. Accused of falsifying documents, tax evasion, and falsifying inventories. So with all these infractions, you'd think that it would have been very, very hard for this guy to find business partners. But after all this happened, he ended up raising $500,000 to create the Allied crude vegetable oil refining corporation. So Tino created this business to help take advantage of the US government program known as Food for Peace, which was set up to help keep crop prices elevated when there was an excess supply and to provide surplus oil to countries with starving populations. Given Tino's sketchy history, this was a perfect hunting grounds for him. He took 22 employees with him from a past venture and paid them over $200,000 annually in today's dollars to do pretty menial labor. So American Express at this time had a subsidiary called American Express Field Warehousing Company or AEFW. And AFW's mandate was to generate approximately $500,000 in profits from the subsidiary. The problem was that it just didn't perform very well. It turned a profit in only 10 of 19 years and had cumulative losses in 1962. AEFW had 500 client accounts, but only two of them actually generated the lion's share of profits. And both of these companies were owned by Tino D'Angelus. So in 1962, Warren Buffett had recently consolidated his 11 partnerships into one creating Buffett Partnerships Limited, BPL. At this time, Buffett was very, very focused on cigar butts. You know, the cheap beat up small companies that nobody wanted to own. But Buffett felt were mispriced and misunderstood. So the crisis happened because eventually it came to light that the tanks were not full of salad oil as they were supposed to be. And to anyone looking at it, it was extremely obvious that it was fraud. First, D'Angelos bought oil futures pushing up prices. He knew that demand for oil would be very heavy around the world and that Russia had some failed crops which would disrupt supply. When regulars demanded to see Allied records, they immediately uncovered the fraud. But as Forester writes in his book, it wasn't really that hard to figure out that this was a fraud. He writes, "According to Census Bureau statistics, AEFW's warehouse receipts total twice as much vegetable oil as all of the oil in the US. By the end of 1963, warehouse receipts had been issued for 937 million pounds of oil worth 87.5 million, while actual quantities were less than 100 million. AMX CEO Howard Clark had decided to sell AEFW as he felt that the subsidiary was compromised due to the scandal. It was also discovered that the head of AEFW held ownership in one of D'Angelus's companies, which obviously was a massive red flag and conflict of interest. So, here's where Buffett went to work. He knew that AMX was a trusted brand, especially in their lending business. And he also followed the story that was unfolding and how it affected AMX's stock price. So 8 months after the scandal had occurred, AMX was trading at a 45% discount. To see if the scandal actually harmed AMX's core business in travelers checks and credit cards, Buffett and an acquaintance that he hired did their own boots on the ground research. They spoke to bank tellers, bank officers, credit card users, hotel employees, and restaurant employees to figure out if AMX was still being used to buy things. But the conclusion was very straightforward. AMX's reputation was still completely intact. The rest is history, but there are many great lessons from the story. First is that trust is fragile. But the trust that is perceived by the market may not align with the trust that actually exists between a business and its customers. If the market thinks trust is broken and irreparable, then the stock price is probably going to be punished. But as Buffett showed here, if you can generate a valid counterargument, you can make an excellent investment. And the second big lesson is that scandals can sometimes make brands even stronger. Buffett's experience with AMX showed him the power of a strong brand. He understood that a business might face a scandal, but if its customers still find value in the product and the trust built with the company over many years, it's really tough to break that bond. And the third lesson is that you must do due diligence on the people that you do business with. D'Angelus may have had some unfair advantages as there were many people who believed he had ties to organized crime. In that case, he may have been funded by people who knew that he was going to break the law. But someone inside AEFW could have looked at D'Angelus's laundry list of infractions and easily concluded that he was not a person to do business with. If you're investing in private or public businesses, spend some time trying to learn about the past of the person leading the business or other key people involved in the business. And the final and most important lesson here is simply that greed can cause us to take risky shortcuts. Donald Miller, who headed AEFW, either knew about D'Angelus's character flaws and chose to overlook them, or he decided not to conduct DD necessary to determine that D'Angelus wouldn't make a good business partner. Either way, Miller, who was required to generate profits for AMX, saw D'Angelus as his ticket to continued employment. Now, what do you get here when you mix an AI craze with a spa? You might be a business like AI infrastructure acquisition, a spa created to advance artificial intelligence and machine learning capabilities. So a spa is a special purpose acquisition company. Basically, you can buy a ticker of a spa, but all you're getting is a promise to buy a business within a certain time limit, usually 18 to 24 months. Now, one of the earliest spaxs was a business that we've already discussed today, the SouthC company. Remember I mentioned that this business wasn't really an operating business as it had no revenue. You were basically buying a company that owned the rights to fulfill some sort of narrative at some point in the future. And because other people observed the hype of the South Sea Company, it attracted many, many cloners. Nearly 200 joint stock companies were formed around the same time as the South Sea Company bubble. These companies were initially in industries like, you know, insurance, fisheries, and finance. But as they saw the market successfully propping up prices, there was a second wave of companies that came that had much more dubious industries related to things such as, you know, services and inventions. These were businesses that purported to do things like improve coal trading, sell largecale funeral furnishings, or even pond brokers. One company carried a patent on heat resistant paint. Another manufactured swords. Another notable company was meant to carry fresh fish from a boat into the fish market, but the fish rarely made it to the market alive. Now, since many of these businesses were just pure fiction, investors back in 1720 were very, very hurt by owning their stock, especially once it was discovered that there was no functional operating business behind them. It's similar to many of the spaxs that investors took part in in 2020 and 2021. They bought into an idea and when it didn't pan out, the investors were the ones holding the bag. One story of investors getting especially taken advantage of was outlined in the great book Extraordinary Popular Delusions and the madness of crowds by Charles McKay. So in this story that McKay covers, there's this business that he says is considered quote a company for carrying on and undertaking a great advantage, but nobody knows what it is. Sounds like a spack to me. Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our TIP mastermind community, a private group designed for serious investors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. People who understand your journey and can help you grow. Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next dog pick, but also sharing lessons on how to live a good life. We certainly do not have all the answers, but many members have likely face similar challenges to yours. And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. We're capping the group at 150 members, and we're looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevesspodcast.com/mastermind. That's thespodcast.com/mastermind. or feel free to email me directly at clay@theinvestorspodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. Each week, Shawn and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, AutoZone, and Airbnb. And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all the aspects of a business from an investment perspective. Go follow the intrinsic value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. The company's prospectus stated that it was seeking to raise £500,000 by selling 5,000 shares at £100 each. Now, here's where the craziness starts. So, the unnamed promoter promised that for each year that the shares were owned, the subscriber would receive £100 per year, meaning he was promising a one-year payback time. The promoter promised details about how he would do this within a month after it closed. The morning after the prospectus was released, the promoter opened his office to a crowd of potential investors waiting to just give him their money. In only one day, he ended up collecting $2,000, which was about $2 million today. He immediately left the country with all the money, never to be heard of or seen again. While this seems like a completely madeup story, McKay wrote, "Were not the facts stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project." But let's revisit that McKay quote again. A company for carrying on and undertaking a great advantage, but nobody to know what it is. It's vital to understand the meaning behind this. A spa really is pure speculation. In modern times, investors might invest into a spa as a form of maybe betting on a jockey. Perhaps there's some sort of investor that you highly respect who you think is a really, really good and talented capital allocator. So, let's imagine a hypothetical world where Warren Buffett gets a second wind and wants to purchase another company for $2 billion and just not include Berkshire Hathaway. I know bad example as the chances of that happening are probably close to zero, but just bear with me. So, if someone like Buffett were to do something like that, my guess is that he would be drastically oversubscribed because people know Warren would probably find it an insanely good business to invest in and people obviously trust him to do a really really good job. But someone like Warren would never do this because it's antithetical to what he believes in. He wants to be a partner with these investors and spaxs create asymmetry between the spa and the shareholder. For instance, a spa creator gets access to a large percentage, usually 20% of the float, at drastically reduced prices. So why exactly should the spa creator get to buy shares at reduced prices? Doesn't this really incentivize them to take larger amounts of risk? And in the case that the spa merges with another company and that company fails, then investors lose all their money and the spa creators may still be able to exit with a profit due to the discounted shares that they received. So whether you're looking at 1720 or 2021, the story is the same. During times when the market is euphoric, scores of people will come into the markets with promises to make you rich. But in reality, they are mostly focused on just making themselves rich at your expense. Which is why I personally have never invested more than a few minutes into spaxs. And the time that I have was purely just to satiate my own curiosity. If there were someone I highly trusted to invest well, I would probably just wait for the spaxs merger to be consummated and find out at that point whether it's a good investment or not. If it's not an investment that I would find interesting, then I simply don't buy it and it makes no difference to my wealth. And if it's a business that I do find interesting, well then yes, I'll probably buy it at a premium if I take part in that spec. But still, you know, I'm willing to pay up for that certainty that the business is something that I can actually understand and will have a good chance of creating shareholder value. Now, a few decades after the South Sea bubble burst, an even stranger financial derivative was created to gamble on the future, and it actually didn't involve highly speculative companies, but children. Gianne Pictet tragically died at the age of four back in the late 1770s. And while her aristocratic family mourned her passing, the French monarchy ruled by King Louis I 14th was secretly rejoicing because her death saved them bundles of money. France had a financing problem for most of the 17th and 18th centuries. They defaulted seven separate times and the money that they needed was spent on wars. The trigger for the default followed a pretty similar path. The war ends, then France would then convert its highinterest short-term debt into low interest long-term debt. Then they debase their currency through recoinage or what we today refer to as money printing. The problem was raising additional funds through measures like taxes, which created all sorts of issues that the monarchy and regional governments preferred to avoid. As a result, a weird, brilliant, and ultimately dangerous financial instrument was created. It was called the Taene. So, you may recognize that word from Bill Aman's failed spack named Persing Square Taine Holdings. Tantines at its core were very simple. They're an insurance contract that provides the purchaser or anatant with lifetime income. It sounds similar to an annuity but with a twist. So there's a very large gambling element to a taunt team. So for a life annuity the payments are fixed. In a taunt they actually increase in size as you get older. The reason for this was that your money was pulled with other investors into the taunt and upon passing their payments would be redistributed to the surviving investors. So the longer you lived the higher your payments would be. And once the last survivor passed away, there was no principal repaid to any of the investors. The government loved them. They got cash up front and quickly and didn't need to repay the principal unlike a bond. The investors love them because they could essentially gamble the duration of their lives to generate future income. The taunt was almost like a protosp very very uncertain outcomes. But in 1770, tens ended up actually being nullified and converted to life annuities. So what happened was the royal government claimed that tontines were very costly and could just no longer be issued. This is where the Swiss came in with some brilliant ideas to capitalize on the conversion of tant. You see when a tanteen was converted to a life annuity at this time the holders of the tantine could appoint a new nominee for the life annuity and the best way to maximize the value of the annuity was to nominate someone young as they're obviously going to have the most years ahead of them to collect those annuity payments. So, a Swiss banker named Jake Bowmont decided that he'd buy up a number of these nullified tant appoint new nominees for the converted life annuity. To reduce risk, he brought in other investors and essentially turned these life annuities into a form of securitization. Since he had other investors and the pool was large, it also created liquidity, allowing investors to get in and out of the investment. Bulman also did his homework on lifespans. Women on average live longer than men. So he decided that nominees should mostly be female. But you couldn't just go with newborns because infant mortality rates were high. Small pox was rampant and your chances of living were much higher past the infant years. The sweet spot that the Swiss bankers came up with was girls aged between 4 and 7 who had already survived smallox and other health issues. But they didn't just want girls who fit those criteria from any old family. No, they wanted the ones who had access to the best possible healthcare as well. So the nominees came from wealthy families who could afford the best possible doctors and treatment. These girls were known as the immortals. So when Gian Pik passed away at 4 years old, the government was able to save decades of annuity payments that it would have had a hard time servicing. But the need for government funding was still high. At the end of the 18th century, as the government continued to need money and investors became interested in future income streams, the life annuity rules changed. So to collect the annuity, you had to prove that the nominee was alive. This proved pretty inconvenient. So there was a workaround that was created which allowed you to just nominate anyone as your nominee. And a really good option was to just nominate a famous person. That way everyone would know that that person was not alive or alive. And so at this time famous people were people in the French royal family. Nominees included people such as King Louis the 14th, his wife Mary Antuinette and other family members. But then the French Revolution happened. The king and his family met the same fate, beheaded by the guillotine. And with that, the annuity payments promptly disappeared. This whole story reminds us that humans don't really get smarter with time. They just find new ways to gamble. Now, everybody listening today has probably heard or taken part in take your kid to work day. It's the harmless tradition of taking your kid with you to see what mommy or daddy does every day at work. and it tends to be completely harmless unless you're 33,000 ft in the air in an airplane cockpit. This was a situation that a pilot found himself in on Aeroflot Flight 593 on March 22nd of 1994. So, one of the backup pilots named Yaroslav Kadrinsky brought his two children up into the cockpit. His 12-year-old daughter Jana and his 16-year-old son Eldar Kadrinsky first allowed his daughter Jana to take control of the plane and fly it for a bit. Jana flew the aircraft for a few minutes, moving a little bit to the right and a little bit to the left. Kadrinsky was taking advantage of the plane's autopilot feature. So, even though Jana felt like she was flying the plane, the autopilot gently guided her in the right direction. Next up was Eleldar. Elar, being a 16-year-old boy, was obviously a little bit bigger than Jana. As he took control, he veered left, but as the autopilot tried to get him to veer back to the right to maintain direction, Elear overrode the autopilot by force. the plane's autopilot was set up for whatever reason so that if the aircraft reached a 45° angle, the autopilot would disengage. So, this allowed a plane to enter, you know, things like a holding pattern above an airport while waiting for a runway to become available for landing. Lar ended up flying the aircraft into a 50° angle, and the plane began to descend. Because they were moving down so quickly, it made it nearly impossible to move inside the cockpit so that LAR could turn the controls over to one of the actual pilots. As the plane descended and the cockpit turned into pure chaos, the pilots tried their hardest to try to guide Eleldar into turning the wheel to stabilize the plane. But at that point, the plane was uncontrollable. They shouted commands to Eldar, but they were just misunderstood. Lights and sounds were going off. The aircraft was stalling and the plane was ascending very fast. At 1,000 ft, Kadrinsky was able to get into his son's seat to try to stabilize the plane. The black box that was picked up caught him saying, "Everything is fine at this point." A few seconds later, the plane crashed into the Kousnetsk Alatau mountain range, killing all 75 people on board. Now, autopilot for airplanes was created in 1912, but it was designed for simplicity rather than transparency. In the Aeroflot disaster, there wasn't really a clear indication that the autopilot had been overridden. If you've ever driven a car with driver assist, you know the feeling when you change lanes. You know, the car may attempt to keep you in your lane, but you can override the autopilot simply by not allowing the car's steering wheel to maintain your current lane. So, when Elar left, he inadvertently disabled autopilot, which caused the entire disaster. This is a case where if we trust our hardware and software too much, we can make very poor decisions. So, what does autopilot look like in investing? During good times, it's easy to rely on just how well the market is doing, which can create complacency. You may stay on top of all your positions and actively look for where things could maybe go wrong. You don't want to stay in a bad position just because your other positions and the market are doing really, really well. Hidden risks are still risks. You should take a look at your positions and determine what could really unravel them. Are those events happening today and you're just not paying close enough attention? Overconfidence is incredibly dangerous. 80% of car accidents happen within 10 miles of people's homes. Areas that theoretically they know better than anywhere else. So areas that you have navigated before always require your attention. The moment that attention goes elsewhere can be catastrophic. In investing, you can't expect a market to continue going up just because that's what it's done for the past few years. You need to plan and strategize for different outcomes to protect yourself when the market turns. That might mean creating scenarios and then using thought experiments to strategize about what you'll do in light of reality. The final lesson here is that when things go wrong, just take advantage of the black box. In the world of investing, the black box is our brain. We can access our previous thinking by tracking it in real time using things like journals. When you make a mistake, look back at your thinking process and why you thought that way. While you'll never eliminate all mistakes, you can reduce the likelihood of repeating the same error, which will have a very significant positive effects through an investing lifetime. So, the last story was about the dangers of going autopilot systems that can quietly drift you away from your goal. And sometimes when you're off of autopilot, there's a lack of notifications and you drift just so far away that you lose all control. Inflation is very similar. It's the financial world's version of autopilot failure. You don't really feel the power of inflation from day to day, but one day you wake up and the dollar that you trusted to help take you safely into the future has just rolled into a 45° turn. So in the late 1770s, the Revolutionary War was going very, very badly for the Americans. The British army had a series of excellent victories and the navy was blockading the east coast. Troop morale was low. They were freezing cold, poorly clothed, starving, and many were in need of medical attention. As a result, mutinies were a very real threat. And to make matters even worse, the soldiers had another worry. This time further away from the battlefield, and this was that money that they were being paid to fight this war was losing its value. If you think inflation is a modern phenomena, you're dead wrong. From a buying power standpoint, the Brits weren't the only villain. Inflation was a real threat as well. It just didn't shoot guns. So, here was the problem. The soldiers were out on the battlefield in deplorable conditions and the money that they were being paid to was losing so much buying power that their families were having a lot of trouble. Food prices were skyrocketing but the soldiers weren't seeing a corresponding increase in their wages. So in 1776 scholars estimated inflation at 14%, in 1777 22% and in 1778 30%. So in 1779, four entire battalions complained that due to the depreciating value of money, they were losing 7/8s of their purchasing power by taking part in the revolutionary war. Losing soldiers was a real problem as many were just deserting to go work on farms. So the government came up with an act to invent a crude type of inflation index. Today we use the consumer pricing index or CPI. Back then they use the prices of only four goods to determine how fast money was depreciating. So the four goods they used were corn, beef, wool, and leather. In 1870, when the act was passed, they looked at the rate of change in price increases for just those four commodities over the last 3 years. And the price for the four goods had actually risen 32 1/2 times over that period. To make amends for inflation, the army came up with an inflation index bond, the first kind in its history. So the inflation index bond would pay four interest bearing payments from 1781 to 1784. Basically, the sums were meant to cover five bushels of corn, 68 pounds of beef, 10 lb of wool, and 16 pounds of leather. These cost about 130 pounds of current money. If these goods continue to inflate in price, the payment would increase with inflation. So, this eased many of the soldiers mind because they knew that tomorrow wouldn't be worse than it was today. So, CPI today is calculated monthly based on the price of 80,000 different goods and services. The Bureau of Labor Statistics or BLS estimates these numbers. The BLS does this by regularly contacting stores across the US to collect data. An additional survey is also sent out to 50,000 residents as well. So the major categories of modern spending are housing, transportation, food, recreation, medical care, apparel, education, and other goods and services. We moved a long way from bushels of corn and soul leather. And ever since the Revolutionary War, inflation has never left the US. So here are the US stats for each century. In the 1700s 6% 1800s negative.2%. 1900s 3.2% 2000s 2.5%. But each century has its own story and inflation has stabilized a lot in the 20th and 21st century due to the formation of the Federal Reserve in 1913. As Forester points out in his book, moderate inflation is actually manageable and is the goal of monetary policy because the opposite deflation is a much worse outcome. In a deflationary environment, consumers expect prices to drop, which delays purchasing decisions and leads to economic stagnation. Japan has gone through this basically since its bubble pop in the '90s. If interest rates are at zero, there's nothing that the government can do to drop prices further. If they maintain a 2 to 3% range though, they have more wiggle room, as we've seen here since CO 19. But no matter what, inflation is basically a silent tax that punishes savers. If you save $100 today at historic modern inflation rates of 3%, your money is only going to be worth $74. So, if we know that cash is a depreciating asset, the solution becomes pretty obvious to savers. Don't keep your savings in cash. I think many of our listeners probably know this, but if you're tuning in and have cash hoarded in tax sheltered accounts, please understand that that cash is not a good asset to hold on to. Cash seems neutral, but it's a net negative. You can think of cash as kind of similar to, you know, leaving ice cubes melting in the sun. So, just like the soldiers who needed wages that rose with inflation, you need to keep your savings and appreciating assets. My asset class of choice is stocks, but there's plenty of other choices out there. Bonds, real estate, commodities, private businesses, cryptocurrencies, or other assets that are tied to real economic activity. As long as you have assets that fight inflation, you put yourself in a great position to win. Now, nobody predicted inflation all the way back during the war for independence in 1779, just like nobody really knew the full effects of inflation that we've had since co. But the winners in modern times are investors who prepared properly. When you construct your portfolio, make sure you're looking at a range of outcome. Ask yourself, will your portfolio be damaged by inflation or will it thrive in it? Along the same token, it's important to have the humility not to rely on a single narrative because then you put yourself at a large amount of risk if you're incorrect on that one story. Another vital lesson here is that real returns matter more than nominal ones. If you get a 5% return with 6% inflation, you're actually poorer. If you get a 3% return with 1% inflation, you're richer. So, your goalpost will move on a yearly basis. But if you choose to earn returns in, you know, the mid to high single digits or higher, you're probably going to end up coming out on top no matter what. Inflation teaches us that money quietly loses value. And while that's an outcome we'd like to avoid, other events happen on a regular basis that can cause us to lose money and not in a quiet way. Sometimes the market just simply plummets. If I ask you what events like this come to mind, you might mention something like the Great Depression. But I want to talk about an event that's even worse which happened over two days in October of 1987. We start on the Monday, October 19th, 1987, the day known as Black Monday. So earlier that morning, Fed chair Alan Greenspan is boarding a plane from DC to Dallas. At this time, there's no internet of course or mobile phones. So if you got on a plane, you're basically completely insulated while on that plane from the outside world. Before Greenspan had boarded, the down was already down 8%. A very bad day. But when Greenspan landed in Dallas, he was horrified to see that the market had dropped 22.6% in that one day. Now, to understand a little more about why this happened, we don't really need to go back too far. In 1986, the market had done well, and the Dow closed at 1,896, up about 23% on the year. On average, the index gained about 1.38% per day. By 1987, the year that Greenspan was sworn in as Fed chair, the market continued climbing to 2722. One of Greenspan's first moves was to raise the discount rate. He felt that inflation was starting to creep up and this is generally not what the market wants. And to make things even worse, the market was also expecting the US currency to drop in value in the near future due to some kind of minor geopolitical conflicts. So on Friday, October 16th, this is the Friday before Black Monday, the market was pretty scared. The market was actually down 4.6% that day. On October 19th, 1987, the Dow, like I said, collapsed 22.6%. to 6%. The entire year's gain was wiped out after Monday's close. A pretty painful outcome for investors. Now, the interesting thing about Black Monday was that there isn't really a consensus cause for why exactly it happened. There wasn't some large event like CO that spooked the market and was likely to have a massive effect on businesses all across America. A few reasons that have been kicked around were the rise in computerized program tating, portfolio insurance, futures markets, and rising rates and inflation. But there wasn't just one cause. It was a confluence of factors that happened that punished the market and it's kind of impossible to blame them all on just one factor. Now, the lesserk known fact about Black Monday is what ended up happening on Tuesday, October 20th, 1987. So, one could argue that the pain was much less on this day, but the events were even more dramatic. So, on Tuesday, there were actually rumors that the New York Stock Exchange might close. This had occurred only four times in history. When JFK was assassinated, for his funeral, when New York experienced an electrical blackout, and for Hurricane Gloria. So, it was a very scary proposition. Forester writes, "By 8 a.m., credit markets were tightening. Not only were specialist firms rushing to borrow, but larger security firms were as well because they had grown their stock inventories by accommodating selling by major clients. Trading, borrowing, and government securities sweltered. Arbitrurers who were trying to take advantage of pending takeovers were forced to put up more capital on their borrowings. Banks were reluctant to settle trades, fearing they might not get paid. Now, sensing that Black Monday could trigger a collapse of the entire financial system, Greenspan got to work trying to ease investors tensions, he made a public statement that the Fed would reverse its tightening stance. The Fed would also act as a source of liquidity attempting to drive down interest rates. The market initially jumped, but then sellers took over once again. So, in the middle of the panic, a small spark emerged. Ronald Cash Maheenman at the Chicago Board of Trade, CBOT, noticed that the price of major market indexes or MMI futures were trading at a massive discount. At 12:38 p.m., a sudden wave of buying hit those futures, flipping them from a huge discount to a premium in just 5 minutes. And that tiny shift triggered arbitrage traders to rush in, buy the underlying stocks, and push liquidity back into the system. And it was a jolt of electricity that the market really needed. Within an hour, the Dow rallied by nearly 6%. So after Black Monday, some say the whole thing was a conspiracy. Doomsayers say that bigger firms coordinated the selling and the Fed's reaction was just too quiet. Others say that it was just unlucky timing, but we'll never know for sure. Crashes can happen fast, but recoveries can also be really fast. The Dow was higher than before the crash by June of 1989. So if you panic sell on these types of events, chances are you're going to miss a lot of the recovery. The biggest draw downs are often followed by the biggest up days. You just never know when those days will actually happen. Liquidity is the market's bloodline and this is more of a top- down view. But if the market doesn't have liquidity, then situations like this can't be solved. While I don't really have a view on how to play this top- down view, I think finding individual businesses with little liquidity can be a giant advantage. When investors with deep pockets want to buy a business's stock with low liquidity, that means that more buying pressure can move the stock up very quickly, and I like to be on the right side of that situation. Crashes can also appear to be pretty random. They aren't always easy to identify, such as a tariff tantrum that we just had in April of 2025. Sometimes they come out of nowhere and wreak absolute havoc over very short periods of time. But the best investors prepare for these occurrences. Big corrections happen every year or so. So, if you know how to handle them without losing your patience and discipline, you put yourself at a major advantage. Having some spare cash can be a massive advantage. If you have cash during these times, you can take advantage of the four sellers by buying the stocks that they're selling at huge discounts. This is a dream scenario for me. So, during November, Lumine has dropped nearly 58% from its all-time high. And to me, this was the market acting irrationally on the stock price, and I took that as an opportunity to add to my position. I love drops like these because Lumen was a business where I wanted to build my position, but it was spending so much time at all-time highs. Now, I get an opportunity to add it at a massive discount. That's all I have for you today. I hope that some of these stories really resonate with you and stay memorable so that you can internalize some of their lessons. If you'd like to continue the conversation, please follow me on Twitter at irrationalmrts or connect with me on LinkedIn. Simply search for Kyle Grief. I'm always open to feedback, so feel free to share how I can make this podcast even better for you. Thanks for listening and I'll see you next time. I often think of what Howard Marx talks about about longevity and wealth creation and that superior investment returns isn't about ranking in the top 5% in any given year. It's about consistency and steady returns over long periods of times. I mean, the message is simple. Avoid big losses and let consistency win. And for me indexing is exactly that average market returns but for a very long